Fitch Rates Sand Creek Metro District, CO's GOLT Bonds 'A'; Outlook Stable

AUSTIN, Texas--()--Fitch Ratings has assigned an 'A' rating to the following Sand Creek Metropolitan District, CO (the district) general obligation limited tax (GOLT) bonds:

--$1.8 million GOLT refunding bonds series 2015A;

--$7.4 million GOLT refunding bonds series 2015B.

The bonds are scheduled to price the week of Dec. 7, 2015.

In addition, Fitch has affirmed the 'A' rating on the following bonds:

--$64.9 million outstanding GOLT bonds (pre-refunding).

The Rating Outlook is Stable.

SECURITY

The bonds are payable from the district's property tax levy, limited to 42.5 mills, and from specific ownership taxes.

KEY RATING DRIVERS

TAXPAYER CONCENTRATION: This limited purpose district has a mix of commercial, industrial and residential space with high concentration among the top tax payers.

LIMITED OPERATIONS; SOLID RESULTS: The operations and maintenance (O&M) requirements of the district are modest and funded by an unlimited O&M mill levy which Fitch considers positively. The district maintains a healthy financial position.

WEAK DEBT PROFILE; MODEST NEEDS: The debt profile is characterized by high debt levels and slow principal amortization, balanced against modest future debt needs.

SOLID TAX BASE EXPANSION: Recent market absorption trends and notably high occupancy rates fueled favorable reassessment gains in the current year. Fitch expects that ongoing and planned development will allow the multi-use district to maintain a stable or positive trajectory in its assessed values (AV).

ADEQUATE TAXING MARGIN: Recessionary AV losses required increases in the district's limited debt service mill rate but adequate margin remains. Recent AV gains and modest future debt plans further aid the prospect of sufficient debt service coverage by the district's resource base.

RATING SENSITIVITIES

LARGE SUSTAINED TAX BASE LOSSES: Sustained and large tax base declines that lead to significantly diminished taxing margin would likely lead to negative rating action.

CREDIT PROFILE

The Sand Creek Metropolitan District is a limited purpose special district encompassing 1,253 acres in the northeast Denver metropolitan area, approximately 12 miles east of downtown Denver and 10 miles southwest of Denver International Airport (DIA). The district provides financing for the construction and installation of streets, drainage structures, street safety controls, parks, water and sewer improvements and other infrastructure systems needed to encourage and support the existing and future development.

DIVERSE SECTORS

The district consists of Gateway Park, a master-planned office park, which has been in development since 1995. The mixed-use business park currently totals about 3.8 million square feet of diverse commercial development. Represented sectors include warehouse, distribution, and research and development facilities (comprising about 70% of total square footage), office buildings (21%), and retail, restaurants, and services (8%). The district also includes 15 hotels with over 2,234 rooms and a residential area with 110 town homes, 63 condominiums, and 778 apartments.

HIGH TAX BASE CONCENTRATION

The primary credit weakness is the concentrated tax base. The top 10 taxpayers total 34% of the district's AV, down notably from 67% concentration in 2006. Additionally, the developer's properties account for a still high 11% of the district's AV, down from 20% earlier this year due to the sale of five properties to independent third parties. Fitch believes such concentration is somewhat balanced against the diverse lease-hold interests represented by 45 different tenants and stable occupancy trends.

AMPLE FLEXIBILITY IN MEETING LIMITED OPERATIONS

The district's limited operating costs and high reserve levels provide it with ample financial flexibility, aided by an unlimited O&M mill levy. Liquidity of the district's general fund has improved notably in the last four years, now equaling one year and a half's worth of expenditures in 2014. However, reserves remain modest as a nominal dollar amount, totaling $1.2 million in 2014.

HIGH BUT STABLE DEBT; LIMITED CAPITAL NEEDS

Proceeds of these issuances will be used to refund outstanding debt for interest cost savings. The district's overall debt burden is a high 14.6% of market value, driven by City and County of Denver (GO bonds rated 'AAA' by Fitch) debt as well as Denver School District No. 1 (GO bonds rated 'AA+' by Fitch). Debt service carrying costs totaled a very high 64% of spending in 2014 which is not unusual for limited purpose entities with minimal operating responsibilities. Amortization is average with 49% of debt retired in 10 years.

Future capital needs are minimal and only a modest amount of additional debt ($1.5 million - $5 million) is under consideration over the medium term. The district does not expect to exceed the current mill rate of 30 and may actually lower it given ongoing and planned development, leaving sufficient margin below the 42.5 mill cap. State law allows a maximum mill rate of 50 but this would require a change to the district's service plan by Aurora.

ROBUST TAX BASE GAINS

The maturing district is 73% developed and benefits from a favorable location for further growth, along Interstate 70 near DIA in the City and County of Denver and the City of Aurora. After posting steady gains to its tax base since its inception, the district's AV declined by a cumulative moderate 10.8% in 2011-2012, fueled by rising vacancy rates and exacerbated by the delay or cancellation of planned projects. AV stabilized in 2013 and grew by 7.2% and 8.6% in 2014 and 2015, respectively. The preliminary 2016 AV points to a large 12.9% increase, 90% of which was the result of reassessment gains enabled by rising occupancy levels and lease rates.

DEVELOPMENT TRENDS

The district reports that occupancy has increased to nearly 100% for most sectors except office properties which comprise a modest 10% of district AV. The district reports 8 projects, totaling an estimated $13.6 million in AV (a 7.3% gain), are either completed, under construction, or permitted. These projects represent diverse sectors and are scheduled to impact the tax rolls beginning in 2017. Additional transit-oriented development may also materialize in the medium term, following completion of the Regional Transportation District's East Corridor Rail Line to DIA, which includes a station within the district.

Additional information is available at 'www.fitchratings.com'.

Fitch recently published an exposure draft of state and local government tax-supported criteria (Exposure Draft: U.S. Tax-Supported Rating Criteria, dated Sept. 10, 2015). The draft includes a number of proposed revisions to existing criteria. If applied in the proposed form, Fitch estimates the revised criteria would result in changes to fewer than 10% of existing tax-supported ratings. Fitch expects that final criteria will be approved and published by Jan. 20, 2016. Once approved, the criteria will be applied immediately to any new issue and surveillance rating review. Fitch anticipates the criteria to be applied to all ratings that fall under the criteria within a 12-month period from the final approval date.

In addition to the sources of information identified in the applicable criteria specified below, this action was informed by information from CreditScope, IHS Global Insight, and Zillow Group.

Applicable Criteria

Exposure Draft: U.S. Tax-Supported Rating Criteria (pub. 10 Sep 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869942

Tax-Supported Rating Criteria (pub. 14 Aug 2012)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. Local Government Tax-Supported Rating Criteria (pub. 14 Aug 2012)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=995359

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=995359

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings
Primary Analyst
Jose Acosta
Senior Director
+1-512-215-3726
Fitch Inc.
111 Congress Avenue, Suite 2010
Austin, TX 78701
or
Secondary Analyst
Leslie Cook
Analyst
+1-512-215-3740
or
Committee Chairperson
Laura Porter
Managing Director
+1-212-908-0575
or
Media Relations
Sandro Scenga, New York, +1-212-908-0278
sandro.scenga@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Jose Acosta
Senior Director
+1-512-215-3726
Fitch Inc.
111 Congress Avenue, Suite 2010
Austin, TX 78701
or
Secondary Analyst
Leslie Cook
Analyst
+1-512-215-3740
or
Committee Chairperson
Laura Porter
Managing Director
+1-212-908-0575
or
Media Relations
Sandro Scenga, New York, +1-212-908-0278
sandro.scenga@fitchratings.com